A Digital Euro: what does it mean for savings and retail banks?

We also believe that the Digital Euro would strengthen the monetary sovereignty of the euro area. However, we predict that the introduction of a Digital Euro could also have some major unintended consequences impacting savings and retail banks if not addressed properly.

Our position paper, issued in March 2023, reflects on the effect of the Digital Euro on retail and saving banks, we highlight three areas where the introduction of the Digital Euro could have a negative impact on our members.

Firstly, the Digital Euro can severely affect our balance sheet activities – the core business for savings and retails banks. Detailed work is still needed to identify a suitable model for distributing, storing and exchanging digital currencies that balances the needs of maintaining the effectiveness of monetary policy transmission mechanisms, customer service and regulatory compliance.

Otherwise, and if the Digital Euro becomes “too successful”, the deposit outflow could reduce the balance sheets of banks and eventually their capabilities to finance the economy – as a result, possibilities for consumer finance, mortgages and SME financing will be reduced and the potential impact on banks’ liquidity positions is very relevant.

Secondly, lots of obligations and requirements will be put on savings and retail banks as envisioned institutions for the distribution of the Digital Euro, whilst a sustainable long-term business model is questionable.

Finally, cashless payments in the euro area are flourishing and are showing healthy growth rates. Under a push from regulators, banks are already heavily investing in payment solutions (notably based on instant payments) that address the need for European sovereignty in payments.

These new solutions under development will need to find their place in the already competitive payments mix – adding yet another competing payment product by positioning the Digital Euro as such is a game changer. At any rate a level playing field needs to be present.

Therefore, although supportive of the Digital Euro, we are of the opinion that many legitimate and reasonable questions still need to be answered and a successful implementation needs to properly address the above concerns. In order to achieve this, we argue for significantly lower maximum caps on holdings. For the distributors of the Digital Euro, a long-term sustainable business model will be required.

And if the Digital Euro will be positioned as a retail payments product, it should not use its privileged position as a public-money funded product by mandatory acceptance requirements that distort the competitive retail payments market.